Austerity Bomb or Cliff of Depression...The Deficit Politic

GWEN IFILL:And return to our series of conversations on what to do about the nation's taxes, spending and debt. Last night, we heard from Erskine Bowles, the co-author of a deficit reduction plan that has been the subject of much attention and debate.

Tonight, we get a very different take on this. Paul Krugman is a Nobel Prize-winning economist at Princeton University and a columnist for The New York Times. He joins us now.

Erskine Bowles may be one of the people you have written about in the past who you called deficit scolds who were touting a phantom menace known as the fiscal cliff.

PAUL KRUGMAN, Princeton University: Yes.

GWEN IFILL:Am I right about that?

PAUL KRUGMAN:Fiscal cliff is not a phantom menace. The deficit right now is, the notion that something terrible will happen if we don't deal with the deficit right away.

The fiscal cliff is a very different story. That's about reducing the deficit too fast.

GWEN IFILL:In fact, you call it an austerity bomb. Describe that, what you mean by that.

PAUL KRUGMAN:Yes.

Well, what's happening is that we are scheduled, unless something is done, basically to do to ourselves gratuitously what has been happening to some of the European economies.

We're going to have substantial spending cuts, substantial tax increases at a time when the economy is still very weak. And, of course, that's a recipe for sliding back into recession.

So, we set ourselves up with the land mine in the road in front of our economy, which is not based on anything real. It's just based on our political mess.

GWEN IFILL:Well, speaking of political mess, both sides now have what they say are -- what appear to be opening gambits on the table. President Obama released his last week, which called for $1.6 trillion in revenues. And the Republicans came back with their own yesterday.

As you have looked at each approach, what do you see in that?

PAUL KRUGMAN:Well, I think it's important. I think the reporting has been a little weak on the Republican plan. It needs air quotes around it, because it isn't really a plan.

They're claiming $2.2 trillion in deficit reduction, but the specifics they have actually laid out, such as they have, are only about $300 billion. And the rest of it is all just vaporware, claims that they will close loopholes, but they won't say what, claims they will cut spending, but they don't say how.

So, the Republican plan is actually just -- it's just a smokescreen. It's a Potemkin plan. There's nothing real there.

The Obama plan is a very good, very sensible plan, which, as we know, has very little chance of taking place in its current form. But it's -- at least it's a real plan. At least we know dwhat it is he's proposing to do.

GWEN IFILL:Among the critics of his plan are those who say that it doesn't do anything or speak at all to the question of entitlement reform or at least cutting the costs of entitlement.

PAUL KRUGMAN:That's a very weird thing. It does, in fact. It actually cut a substantial amount from Medicare spending.

It actually -- of course, the Affordable Care Act, Obamacare, does a lot to curb the long-run growth of Medicare costs.

So, there's actually a lot in there. He's actually done more to bring down the cost curve for Medicare than anyone has ever done before.

But in Washington, that is considered not serious because he's not actually taking benefits away from people who need them. So, it's a really weird thing. It's only considered serious if you inflict pain on vulnerable people.

Obama is actually very serious in the real sense. It's just the notion he hasn't done anything on entitlement reform is totally unfair. He's done more than anyone has ever done before.

GWEN IFILL:Well, talk about one part of the Republican, if you want to put air quotes around it, plan, as you replied, and that's the idea of raising the eligibility age for Medicare. Why isn't that something that might actually be a big first step?

PAUL KRUGMAN:Well, first of all, it's very small amounts of money.

The Congressional Budget Office put it at a little over $100 billion over 10 years, which is trivial in all this stuff.

It doesn't save very much money; 65- and 66-year-olds are young seniors, so they don't cost a lot actually. They don't have the health problems.

So, even kicking them off the program doesn't save you very much money. It doesn't bend the cost curve. It makes almost no difference to the financial outlook.

But it's cruel. It's taking a lot of people who are counting on being able to have finally guaranteed insurance and kicking them out into a -- we don't know whether Obamacare will -- how thoroughly it will be implemented. It's just -- it's -- it's exactly what I was saying, that it sounds serious because it's hurting vulnerable people.

But if you actually look at the dollars and cents, it's not serious at all. And, of course, it will cost people much more.

You're talking about saving -- for every dollar that the government says, you're imposing $2 of costs on the people who are thrown off the program.

GWEN IFILL:What about inflation adjustments for Social Security? That would certainly save more.

PAUL KRUGMAN:It does save, but, again, it's surprisingly small. I rolled my own estimate and said that's $180 billion over the next 10 years. Other people think it's a bit less than that.

It's a really pretty -- you know, and, as far as we can tell, the actual inflation rates faced by seniors is, if anything, a bit higher than the official inflation rate. So, you are again inflicting some serious hardship for very little money.

All of these things that have occupied all our attention are not actually where the big bucks are. The big bucks are in making high-income people pay higher taxes and in actually addressing health care costs, which the Affordable Care Act does and none of the things that we're talking about now will actually do.

GWEN IFILL:Are you hearing movement that I'm not hearing on this idea of raising -- of raising taxes on the wealthy? Because that's the one thing that John Boehner has said he will not do, raise rates.

PAUL KRUGMAN:Yes. I mean, everybody's guess -- and I have no more expertise than anyone else -- is that we will go over the cliff. Taxes on everybody will go up. Then the Democrats will propose a bill that cuts taxes on the middle class. The Republicans won't dare vote it down.

And so we will in the end have gotten higher taxes on the wealthy through this sort of back-door route. That's -- Tim Geithner, not always my favorite person, but he is right. You cannot have a serious plan unless those tax rates on the wealthy go up.

GWEN IFILL:The president has also proposed something that John Boehner calls silliness -- or, I should say, Secretary Geithner actually did -- which is taking the idea of the debt ceiling off of Congress' plate, something which members of Congress seem to think at least is a nonstarter.

What is the value in putting that out there?

PAUL KRUGMAN:Well, again, it needs to be said. This is crazy.

Where do spending and tax revenue come from? They come from bills voted by Congress. So, the way that the debt ceiling works is that Congress can actually vote to not tax enough to pay for the spending it proposes, and then it can refuse to allow the government to borrow the money to make up the difference between its own spending bills and its own tax bills. This is crazy. This is a license for continual irresponsibility.

And, of course, we're heading for -- the Republicans are attempting to do government by blackmail. Don't -- give us what we want, or we will tank the economy. Nice little economy you have got here. Shame if something were to happen to it. And we can't run on that system. So we have to -- this needs to be taken off the table.

GWEN IFILL:So, let's just assume for a moment that we do go over the cliff, as you suspect. Where do we land? Where is that balance that both sides are looking for, your best guess?

PAUL KRUGMAN:Well, I mean, in a way, you could say a balanced outcome is that most of the Bush tax cuts will survive.

In fact, the fact of the matter is just a piece of them, a small piece, is going to be taken away. There's a lot of things that the Democrats want, extension of the payroll tax, expanded unemployment benefits, more stimulus in general, that probably won't happen if we go over the cliff.

So, it's not as if we're talking about a situation in which President Obama gets everything he wants. And I'm not sure. Why is balance -- what we want is the least bad outcome for the U.S. economy and the U.S. long-term fiscal outlook that we can get.

I don't think that balance is what we're seeking. What we're seeking is -- is, let's try not to mess up this situation even more than it already is messed up.

GWEN IFILL:Do you agree with Erskine Bowles, who told us last night that where we are right now resembles Kabuki theater?

PAUL KRUGMAN:I think it's a little bit more than that.

I think that there is a much deeper partisan divide. I think Erskine Bowles, bless his heart, still wants to believe that we live in the Washington of 20 or 30 years ago, where reasonable men could get together and make sensible deals.

I don't think we're in that Washington anymore. I think this is going to be not -- I don't think there's going to be much of a deal. I think there's going to be a kind of -- there will be an outcome, which hopefully won't be too bad.

But the idea that we're actually going to have guys shaking hands and everybody feeling good about the outcome, that's not -- that's not America in the year 2012 or 2013.

GWEN IFILL:Paul Krugman of PrincetonUniversity and The New York Times, thanks so much for joining us.